ACC300 AUDITING AND ASSURANCE

Part A

i) Preliminary Risk Assessment of Elmo Software Limited

Preliminary Risk Assessment is a part of the audit plan which is generally considered while auditing a
new engagement. Generally, it is done at the initial stage of the audit in order to understand the
potential risk involved during the process of audit. While assessment of the preliminary risk both
quantitative and qualitative risks are considered. By quantitative risk we mean assessment of some
specified/certain events that might cause risk to the firm and identifying its consequences and
qualitative risks are assessment of events that are uncertain and accordingly understanding its
consequences from various outcomes. Preliminary risk assessment thus is an important part while
conducting a new engagement since at very early stage one could assess the possible hazards in the
internal control system and firm’s accounting procedure which is necessary for correcting mistakes
involved in the same (Ethridge, Marsh & Canfield, 2005).

The Elmo software limited company is engaged in providing learning contents and software solutions
across many countries over the past many years. It has integrated cloud-based Hr and payroll software
and e-learning courses which covers a wide range of topics and the target market of this organisation
is mid-market and lower market organisation as Hr solution option available to them are limited. The
software is built and maintained in- house by the team of Elmo.

The environment in which the company is working is subject to changes as the standards of the
industry in which it is operating may change, technology may change, need and requirement of the
customers may change.

As per the understanding of the company and its environment, preliminary risk involved and assessed
are rapid change of technology, employees retention as personnel working on particular in built
software may not get the replacement so fast, in order to attract large number of customers, Elmo have
the database and confidential information of all the existing customers and all prospective customers,
so chances of loss/theft/misuse of the data available may occur>also since the company is working on
a very large scale proper accounting tools should be available in order to assess the financial position
and growth over the period of time.

ii) Analytical review of the company can be drawn based on the information available on the
various platforms and understanding the relationship among the financial and non-financial data of the
company.
 As per the ELMO report for the year ended 30 June 2018, the financial information gathered depicts
that the company has achieved results more than those forecasted. This can be explained by extracting
some of the information from the report such as pro forma revenue as posted in the financial
statements is $23.2m which is $17m in the financial year ending 2017 that is 3.4% more than
forecasted, pro forma earnings before depreciation, income tax, amortization and finance expense is
$2.7m which $1.2m in the previous year that is 1.4% more than proposed forecast. The growth of the
company’s performance was generally due to expansions made, investing a huge amount in marketing
and sales team and taking steps to increase customer base by providing attractive offers. The financial
performance of the company as per the reports posted publicly for the year ended 30 June 2018
reveals the growing trend of the company.

Also taking into consideration of the financial position of the company it could be analysed that the
company has a favourable cash position since no debts were there. Since the company has made the
acquisitions during the period ending 30 June 2018 the working capital of the company shown are
positive.

The risk involved while conducting the business need to be assessed and analyse in order to protect
the company from all possible threats that may hamper the growth and financial performance of the
company. The business risk in case of ELMO software limited is as follows:

 Retention of customers: According to the business model of ELMO it has been observed that the
customers are not under obligation to renew the software. So, it is not necessary that the existing
customer will continue in future, also attracting new customer require catchy offers and service
satisfaction which ultimately slower the growth of the company.
 Adequately maintaining and developing the software: ELMO software if not updated timely
according to the regulatory changes, industrial changes, needs of customers and their preferences then
ELMO may end up with revenue loss as errors may pertain in future and customer service satisfaction
will fail.
 Retaining of key employees: Since the software is developed and maintained by in- house team of
ELMO, the employee’s retention is very important as replacement of them could not be possible so
fast.
 Theft/loss/Misuse of data: ELMO has a huge customer base and confidential data of the customers is
stored by it for follow up purposes and also have the data of the prospective customers for attracting
them towards their product. So necessary steps should be taken in order to prevent loss, theft or
misuse of data (Julien & Sabih, 2012).
 Shortage of funds: ELMO needs to invest in product research and development for this huge amount
of investment is required. If shortage occurs at any phase then the same shall cost the continuity of the
business and all the money spend on research goes in vain.
 iii) Planning materiality is generally calculated by the auditor at the initial stage of the audit on the
basis of the financial statements available to them. They make such calculation in order to find out the
amount of misstatement that may occur during the audit and if misstatement occurs more than or
equal to the percentage calculated by them then the same shall be adjusted accordingly.

For example, ELMO’s planning materiality is taken by considering revenue and profit before tax
which comes out to be between the range of 7%-9%. If the lower percentage persists while
completing the audit then there is no need to make adjustment but if the percentage goes above the
said threshold percentage then the same should be adjusted and necessary misstatements in the
financial statements should be reported in the audit report.

Part B

i) According to Corporations Act of Australia, a quality and effective independent audit is one
which contributes in accomplishing the primary objective that is of providing reasonable assurance
about the authenticity of financial statements of a corporation and highlighting any misstatement or
deficiency observed during inspection of financial reports (Harding, 2001).

The independent audit builds the confidence of stakeholders in the authenticity of the financial reports
which serve as basis for making investment decisions. Following are the major concern on the quality
and effectiveness of the independent audit:

 While conducting an independent audit it is essential that the auditor must not have conflict of interest
with the client.
 It is necessary for the auditor to provide declaration in writing stating that professional code of
conduct or requirement of auditor’s independency for audit has not be contravened.
 Further, while conducting independent audit, auditor must review financial reports according to the
accounting standards and should present his opinion on the fairness and correctness of the financial
position of the corporation
 Also provide his comments on the compliance mechanism of the entity on keep records and
presenting them as and when required. An effective audit report must present the views of auditors on
compliance mechanism of the entity and the answers received by the management as explanations
which shows as a strong evidence of audit.
 One of the crucial parts of conducting quality independent audit is to exercise professionalism. An
auditor must seek out for answers to his doubts which occur while conducting audit and must refrain
from over-reliant behaviour and must challenging the explanations presented by management if sound
to be unsatisfactory.
 It is very necessary that auditor must hold suitable experience before conducting independent audit
and must provide proper training to his audit team before executing action plan.
 Effective planning of the audit program is highly important to avoid any deficiency or failure during
the execution on the plan.
 Scrutinizing the root cause to any deficiency in the audit plan identified during audit and making
suitable changes to the plan is very crucial for conducting effective audit.
 Identifying related party transaction which leads to misrepresentation in the value of assets or any
other transactions that affect the presentation of profits in the financial report of the entity.

The main purpose of the independent audit is to give assurance to stakeholders of the company about
the authenticity of the financial statements presented by the company or to bring out the deficiency in
the financial reports so that correct financial position of the entity can be ascertained. It is highly
essential for auditors to develop techniques which can identify frauds, misrepresentation.

The primary responsibility of the quality of financial statements lies with the Directors of the
corporation which is further supported by the report given by independent auditor after conducting
audit. Companies must maintain proper records which give foundation to the information presented in
financial statements of the entity (Hecimovic & Martinov-Bennie, 2011).

ii) The framework of regulations for audit and review process of audit are main factors for quality
and effectiveness of independent audit.

Factors that affect the quality of audit are the legal framework relating to independence of auditor
under Corporation Act 2001, Standards of Accounting and Auditing, Ethical standards followed by
professional bodies and their members, Experience, skill and quality of an auditor including their
team, role of regulators of audit and review process bodies such as ASIC.

The culture of a firm involved in audit, strategies, plans and processed adopted by them and the level
of expertise in technical area as well experience of the team conducting audit are other factors that
affect the quality and effectiveness of an independent audit ( Wong, 2008).

The concerns relating to the quality and effectiveness of independent audit are now being addressed
under Australia’s Audit Regulation Framework in following manner:

 Australian Standards for auditing and ASQC1, relating to control the quality of the firms engaged in
auditing and reviewing of financial reports and engagements in other assurances, were issued by the
Auditing and Assurance Standard Board.
 An independent regulator ASIC has statutory power to make necessary regulations relating to
introduction of annual report on transparency, notifications and reports on audit deficiency and
functions of independent auditors.
 ASIC further developed a program relating to Audit inspection which connects with all the aspects of
audit such as quality of audit, independence of the auditor.
 The auditing firms were asked to focus on three major areas in ASIC’s inspection report:
 Auditors must exercise professional scepticism.
 Through the inspection report it can be ascertained the extent to which reports of other auditors can be
relied on.
 Sufficient and appropriate data must be collected by auditor as an evidence of the audit.
 As per the quality review programs, all the major firms involved in audit are subjected to inspections
under ASIC, through which a review on quality in done by professional bodies which in turns helps in
reducing the burden of the firms related to compliances.
 Financial reporting council (FRC) in Australia oversees the effectiveness of system relating to
financial reporting.
 Further under Corporation Act the principle of fairness and truth was addressed relating to the
compliance of the financial reports as per the standards given by the board.
 Industrial bodies such as Australian Institute of Company Directors or Association of Australian
Shareholders were advised to prepare and conducts educational seminars relating to the nature and
scope of audit and also educate stakeholders that audit is meant to provide an assurance in relation to
authenticity of financial statements instead of providing guarantee ( Auditing, assurance and ethics
handbook, 2019).
References

Auditing, assurance and ethics handbook, 2019 : Australia, incorporating all the standards as
at 1 December 2018 . (2019). Milton, Queensland: John Wiley & Sons Australia, Ltd.

Ethridge, J., Marsh, T., & Canfield, K. (2005). ENGAGEMENT RISK: A PRELIMINARY
ANALYSIS OF AUDIT FIRM’S CLIENT ACCEPTANCE DECISIONS. Allied Academies
International Conference. Academy of Accounting and Financial Studies. Proceedings, 10(2),
39. Retrieved from http://search.proquest.com/docview/192411483/

Harding, D. (2001). Referral of powers paves way for Australia’s Corporations Act.
International Financial Law Review, 20(4), 57–58. Retrieved from
http://search.proquest.com/docview/233189763/

Hecimovic, A., & Martinov-Bennie, N. (2011). The Differential Impact of the Force of Law
Australian Auditing Standards. Australian Accounting Review, 21(2), 183–192.
https://doi.org/10.1111/j.1835-2561.2011.00131.x

Julien, D., & Sabih, S. (2012). A Risk-Based Method for Audit Site Selection. International
Journal of Government Auditing, 39(4), 24–28. Retrieved from
http://search.proquest.com/docview/1115042607/

Wong, J. (2008). Auditing, assurance and ethics handbook 2008 . Frenchs Forest, N.S.W:
Pearson Education Australia.